Tuesday, June 16, 2015

The Manipulation Game

I learnt this a part of economics- The Circular Flow of Income.

Industry produces goods: people buy the goods with their wages :: People work for the industry making the goods: Industry pays people wages.

This was simple and pretty basic. Then there was the government which taxed the people and industry to provide for the infrastructure for both. The next layer was financial institutions which gathered surplus from the wages and loaded it to the governments and industry to bridge gaps and grow larger. In return, people earned interest and bought more goods…. And so the cycle grew larger with a global perspective and international trade come in.  

In an ideal world, we have actually set in motion a perpetual growth system that is worldwide and self- sustained. But somehow this never happens. There is always a rouge element which tries to play folly and break the complete cycle. In most cases globally, a government- industry- financial institution nexus has often played havoc and has left communities, countries and even entire financial structure around the world jeopardised. Enron, the crash of 2008 are just a few examples which have left a mark on global economy.

Living in a world where nothing seems to be robust leaves a lot of gaps for me to think in all the places where greed and instant profits are linked to a scenario that seems a calamity but seems like a cover- up for a larger plot. I can’t help but speculate that sometimes it almost seems like a crisis is being created to manage the financial bearings. When companies issue stocks, they are borrowing from people with the idea of mutual ownership and sharing of profits. When the company buys back their shares; dividend is no longer a liability to be paid. A recent article by Jayant Vidhvauns in a Marath daily drew my attention that this is actually a big possibility. (

Let’s take the recent case of Maggi in India. A legendry brand that’s almost 30 years in existence and stands to take 70% of the instant noodles market. It contributes in the range of 20% of Nestle India’s revenues and is almost a habit for most people who have grown with the brand. We always knew it was not healthy, had MSG and other flavouring agents. So why all of a sudden did one fine morning in June we got alerted? How did this happen to a company that was over exceeding analyst expectations? Why all of a sudden did the share prices fall for a few days and bounce back? Its hard to imagine how many shares might have been bought back by Nestle within the sessions it was running low and how much money was lost by the investors in the process. 

I can’t help but question, is this a planned move to buy back shares in a bid to retain profitability? The company has recovered its shares in the few sessions of panic sale and now the stock is back on track. People have lost money- the company lost nothing. As for its reputation: the entire set of packaged food market with all its competition has gone sluggish; so no loss of market share. The losses in sales are going to be far less as compared to the dividend to be spread amongst shareholders.
Now wait a minute… How did Cadbury’s get worm infested in 2003? Never happened before or after? But that was the time Cadbury got "Delisted" and there was an active buy back. How come Coke had pesticide residues one year and is sharing happiness ever since with no issues? Not to mention the pesticides later got bottles from all the brands and no one lost anything in the market. 

I don’t have enough evidence, study and the understanding to put my finger on things. But one thing is for sure; there are more ways to manipulate and control the business outcomes- especially when big numbers exchange across over a matter of few days. Shares have often been subject to allegations of insider trading, bubbles and scams- but this seems to be a new way that even the regulators might find tough to manage and distinguish as a rouge activity. No matter if you agree or call me a skeptic-  Business today is not just a PnL statement- it is an entire manipulation game. 

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